Signed into law by President Joe Biden in August, the Inflation Reduction Act aims to subdue health care costs and address climate change.
The new law includes tax credits for producers of hydrogen, nuclear and wind energy, as well as carbon-capture technologies, biofuels, residential solar systems and heat pumps. Lesser-known aspects of the legislation include incentives for sourcing U.S.-produced iron, steel and other construction elements.
What do these changes mean for clients of financial advisors? Many advisors don’t pick single stocks, as old-fashioned brokers did. Instead, most of today’s advisors favor mutual funds and exchange-traded funds. But these investment vehicles may have a considerable stake in companies that are poised to profit, or even face losses, as a result of the Inflation Reduction Act’s provisions.
It’s probably too soon for advisors to be bombarded with client questions about the law, if that happens at all. However, if clients can benefit from owning stocks of companies that could benefit from the new incentives, financial advisors should be prepared to discuss that.
“After half a century of fossil fuel-friendly policy that siphoned off the capital needed to future-proof the U.S. economy, the Act at least starts the clock on investing in the energy transition,” says Blaine Townsend, director of sustainable, responsible and impact investing at investment advisory firm Bailard in Foster City, California.
“It is our strong belief that there will be no more important investment opportunity over the next 50 years than decarbonization and energy transition,” he adds. “This Act is an important first step.”
Here’s what advisors should know about adding exposure to the Inflation Reduction Act in client investment portfolios:
— Implications for client portfolios.
— Companies likely to benefit.
— “Clean” is not necessarily “sustainable.”
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Implications for Client Portfolios
While the new law creates opportunities in several categories of equity investments and will eventually have implications for portfolio construction, advisors are not generally prone to shuffle client positions based on a news event or the passage of new legislation. After all, the role of an advisor is to keep clients on track with their investment strategies.
However, advisors and asset managers are beginning to think about the Inflation Reduction Act’s impact on client accounts.
As the law provides a massive inflow of $370 billion to clean energy initiatives, certain companies will enjoy tail winds for years to come, says Andrew Poreda, senior ESG research analyst at Sage Advisory Services in Austin, Texas.
He notes that companies set to receive incentives include obvious ones, such as automobile manufacturers shifting toward electric vehicle sales. However, there are also less obvious beneficiaries, such as oil-and-gas companies developing carbon capture or green hydrogen technologies.
Poreda says his firm is approaching the investment implications of the Act prudently. For example, “In the case of electric vehicles, with the rising supply chain costs, we must be very cautious about whether companies strategize to sell vehicles under the $55,000 price limit, or $80,000 for SUVs,” he says.
He cites the situation with a base 2023 Tesla Model 3, which has a price tag that may start at $48,000. “Many consumers currently purchase those cars with options and trim lines above that threshold,” he says. “So, how sensitive will Tesla and consumers be to this figure?”
Poreda adds that the U.S. currently has limited capacity to meet the demand for products like electric vehicles and solar panels.
“We must make huge strides in areas like rare earth mining and silicon wafer manufacturing domestically and globally,” he says. “To date, we haven’t seen as many big announcements on the supply side of the equation as I expected, minus the myriad of battery factory announcements.”
Companies Likely to Benefit
Matthew Breidert, senior portfolio manager at Ecofin, which is based in Overland Park, Kansas, but has offices internationally, says companies that may benefit from the Act include solar energy specialists Sunrun Inc. (RUN) and First Solar Inc. (FSLR), as well as auto manufacturers.
Addressing the latter category, Breidert believes the new law will lift electric vehicle sales rates enough to rapidly challenge the market share of internal-combustion-engine vehicles.
As a potential investment, Briedert cites TE Connectivity Ltd. (TEL), a Swiss firm that makes electrical charging gear for electric vehicles.
“We think the market may not fully appreciate how large growth rates may accelerate for some of these players,” he says.
“Clean” Is Not Necessarily “Sustainable”
Nick Cantrell, founder of Green Future Wealth Management in Worcester, Massachusetts, says his firm is helping clients add exposure to companies that may benefit from the Act. His strategy is to target companies involved in the businesses of clean energy or clean tech.
“Most of our clients are sustainable investors, so we’re being really careful to make sure that the companies or funds that we are adding are still a fit for a client’s values,” he says.
Cantrell says that caution is in order. His firm tracks more than 100 metrics pertaining to environmental, social, and governance investing, known as ESG. He says that just because a company generates its revenue from clean technologies, that doesn’t necessarily mean it’s sustainable.
“So for most of our clients, it’s not enough to just dip your toe into solar energy if it’s a company with a poor environmental track record,” he says. This type of greenwashing can make decisions about ESG stocks unclear for some potential investors.
“What is clear,” says Cantrell, “is that there will be some winners as a result of this legislation.”
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The Inflation Reduction Act’s Impact on Client Portfolios originally appeared on usnews.com
